However, his son Ravi Das, who is well familiar with modern-day financial wisdom, suggested his father to go for another approach called systematic withdrawal plan (SWP). He asked his father to withdraw the upfront payment of the house from the mutual funds and take a home loan for 20 years and pay the EMIs with the SWP payouts.
So, what happened next? Did Gunjan Das agree to plan and if he did what was the strategy? Let’s find out! But before that let's quickly understand what SWP is and how it works.
What is SWP?
A systematic withdrawal plan (SWP) is a tool offered by mutual funds that allows the investors to withdraw a fixed amount at regular timeframe. You can set the withdrawal to monthly, quarterly or annually from your invested amount. You can consider this as an opposite of systematic investment plan (SIP) where you invest regularly.
SWP is a smart tool to pay your bills and manage lifestyle expenses. You withdraw a little from the corpus for your needs while the investment keeps compounding, making the fund last longer. SWP also offers the benefits of regular payouts with lower taxes as compared to other traditional options like FD’s.
How SWP Works?
So, let’s suppose your fund corpus is Rs 30 lacs and you decide to withdraw 6% to 8% annually:
- 6% = Rs 1.8 lakh/year or Rs 15,000/month
- 8% = Rs 2.4 lakh/year or Rs 20,000/month
Average returns can be expected between 10-11% p.a. in a Hybrid fund over a longer time frame out of which even if 8% is withdrawn, remaining fund continues to add 3% additional to the fund. This range ensures longevity of corpus with market-aligned returns. To learn more about SWP withdrawal, you can use MINTIT Tax efficient regular Income calculator and calculate what amount you need for a particular monthly income.
SWP Against Home Loan EMI
Ravi Das suggested his father to withdraw Rs 5 lakh for the downpayment of the house and take a loan of Rs 45 lakh for the tenure of 20 years. He advised that the interest rate on a home loan is 8% while the mutual funds investment has a compounded annual growth rate (CAGR) return of 15%.
Ravi Das believed that with this projection the home loan will be fully paid in 20 years and a significant corpus will be left with this smart SWP strategy.
- Let's see how the calculation works:
- For a home loan of Rs 45 lakh with 8% interest for 20 years tenure, the EMI will be Rs 37,640 per month.
Gunjan Das withdrew Rs 5 lakh from mutual funds for downpayment and let Rs 45 lakh remain invested to withdraw the EMI amount of Rs 37,640 per month i.e. 10%.
The total withdrawal will be around Rs. 90 lakhs in 20 years. Now if the investments grow with 15% CAGR, Gunjan Das will own a home in 20 years with all EMIs completely paid and a corpus of around Rs 2.42 Crs. A home and nearly Rs 2.40 crore left in the purse!
Hence, Gunjan Das took a home loan instead and set up a SWP to pay EMIs from the existing corpus. By doing this, he further allowed his investments to grow and let it take care of EMIs. This is the beauty of investing in mutual funds, you can optimise it in different ways. Even after your goal is accomplished, you can use it smartly to buy things you always dreamt of.
Why This is a Smart Approach
If Gunjan Das would have adopted the traditional method to buy a home, he would have lost the opportunity to get nearly Rs 2.40 crores. But why is this really a smart approach? Let’s discuss:
- Double Growth- After 20 years, Gunjan Das will not only have a corpus of nearly Rs 2.40 crores but also a home whose value will also grow in 20 years. In monetary terms, if we expect the value of real estate to grow with 10% CAGR, the value of a home worth Rs 50 lakh will be worth Rs 3.36 Crs in 20 years. So, indeed this is a smart approach.
- Wealth Creation & Asset Ownership- With this smart approach you can own an asset without selling your existing investment. This will help you to extend the wealth creation and enjoy the growth of your asset.
- Maintains Liquidity- When a highly liquid investment remains with you it does not only help to pay EMIs via SWP, moreover it acts as liquidity to also help with your emergencies and opportunities.
- Tax Efficiency- SWP is tax efficient, there is a tax exemption of Rs 1.25 lakhs if you hold equity funds for more than 1 year. While doing SWP, you’re selling a part of your investment, hence capital gains tax is applied. However, while withdrawing monthly amount, backend calculation will show that some was redeemed from principal & some portion came from gain & since capital gain is applicable only on the gains, there is a significant reduction in tax component on total withdrawal made during the year.
A Little Caution
As your true financial guide, it is our responsibility to educate you in a simplified as well as practical manner. SWP is a future projection approach based on calculation. Although it’s success ratio is high, but a few factors can hinder the calculation which you need to keep in mind.
- Expected rate of returns- SWP is calculated on the future expected rate of returns, if the CAGR changes significantly then it can affect your final value. However, if the CAGR return is delivered more than you expected than the final value can change significantly.
- Choosing Fund- Equity mutual funds have their own phases of growth, consolidation and correction. Hence it is advisable to choose Hybrid mutual funds for SWP. However, if you choose equity mutual funds to get a higher value after EMIs, then have an emergency fund to pay in times of need.
- Planning to Sell- This strategy of paying home loan EMIs with SWP can hinder if you withdraw from your funds for any unforeseen events. It is advisable to calculate your requirements in advance & keep aside money for your emergency needs or other goals so that the initial plan does not get compromised.
Hence, it is suggested to have a handholding in these financial matters which have a significant impact on your financial nest. From the journey of creating SWP funds, SWP strategy to the journey of setting the smart approach for SWP payout, MINTIT with its specialised professional guidance can help you navigate through all.
MINTIT, India’s only dedicated Mutual Fund Platform which caters to your personalised goals and accompanies you to achieve your financial milestones is eager to help you build your wealth. Depending on your profile it can precisely suggest tailored investing plans to achieve your goals.
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